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Friday 13th – S&P made it unlucky for some Eurozone countries

Friday 13th – S&P made it unlucky for some Eurozone countries

Cynics might argue that S&P’s ratings changes are generally announced on a Friday night to secure maximum publicity over a whole weekend. The agencies themselves argue that the timetable is designed to minimize market disruption and to allow analysts and investors to reflect on fresh information and prevent disorderly market conditions. There’s probably some truth in both these arguments, but the process is then totally undermined by rumours and leaks ahead of the official announcement. So, whilst this morning’s 3bp increase in both Italian and French 10 year bond spreads relative to Germany looks orderly, it follows a very volatile Friday afternoon session which saw bond prices and the euro itself come under heavy selling pressure.

EUR/USD has hit a 16 month low of 1.2626, whilst EUR/JPY at 97.04 is the lowest in more than 11 years. And, though GBP/EUR has edged back to 1.2101, this more than half a penny above last week’s lows as the pound itself has fallen below USD1.53.

A fairly quiet week would have been in store for the Eurozone after the ECB voted unanimously to keep rates on hold last week. Draghi is due to testify to the European Parliament on Monday evening, but this will be in his capacity as head of the European Systemic Risk Board, so the discussion is likely to touch on the robustness of the Eurozone banking system rather than on the outlook for monetary policy. Instead, expect a lot of market focus on the success – or otherwise – of the EFSF’s 182 day Bill auction on Tuesday and the broader implications of S&P’s sovereign downgrades for the EFSF’s own credit rating.

As far as hard actual economic facts are concerned, the Martin Luther King Holiday in the United States today means that the week starts slowly and that US economic data is pushed towards the end of the week. As with the UK, the interest will largely focus on what the outlook seems for Q4 GDP growth, with Wednesday’s industrial production the key release for those looking to forecast output growth.

With the Advance Estimate of Q4 GDP being released next week, we start to get the final pieces of the jigsaw later this week to firm up forecasts. Last week NIESR estimated that the economy grew by 0.1% in the three months to December despite what looks to have been a fairly sharp contraction in industrial production. December labour market data and retail sales could well outperform expectations as we would expect to see a seasonal hiring in December a little stronger than last year due to the mild winter. We look for only a 2,000 increase in the claimant count, but average weekly earnings seem destined to remain below 2%, leaving them well below the rate of inflation.

What does this all mean for me? Well buying your EUR, USD, AUD or any other currency at the wrong time could cost you a fortune. There is no crystal ball but Currency UKcan give you the information you need to make an informed decision.

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